See accompanying notes to unaudited condensed consolidated financial statements.


	(unaudited) September 30, 2016			December 31, 2015			(unaudited) June 30, 2017			December 31, 2016
Assets
Current Assets
Cash and cash equivalents	$	269.3		$	323.6		$	306.6		$	330.4
Marketable securities		409.5			321.6			434.3			424.2
Receivables		517.3			501.4			566.8			518.7
Inventories		258.6			222.9			287.0			251.1
Other current assets		52.9			45.9			45.6			37.6

Total Current Assets		1,507.6			1,415.4			1,640.3			1,562.0

Property, plant and equipment		919.8			866.8			975.2			932.5
Less accumulated depreciation		(461.4	)		(424.1	)		(499.4	)		(470.6	)

Net property, plant and equipment		458.4			442.7			475.8			461.9
Goodwill		491.8			420.9			493.1			491.5
Other intangibles		311.8			291.0			302.3			308.3
Other assets		54.8			59.2			72.5			67.3

Total Assets	$	2,824.4		$	2,629.2		$	2,984.0		$	2,891.0

Liabilities
Current Liabilities
Trade payables	$	455.8		$	424.9		$	493.1		$	528.6
Accrued payroll and benefits		76.8			81.6			70.0			84.3
Accrued liabilities		97.6			90.1			91.5			101.0
Product warranties		44.6			43.7			43.8			44.5
Debt due within one year		7.3			12.9			7.4			7.2

Total Current Liabilities		682.1			653.2			705.8			765.6

Long-term debt		328.9			236.1			367.7			316.4
Pension liabilities		95.2			134.2			102.8			109.0
Other liabilities		192.6			163.4			194.0			184.7

Total Liabilities		1,298.8			1,186.9			1,370.3			1,375.7

Stockholders’ Equity
Class A Common Stock, $5 par value: authorized 27,000,000 shares; issued 26,350,200 and 26,373,396		131.8			131.8
Common Stock, $1 par value: authorized 240,000,000 shares; issued 164,357,392 and 164,334,196		164.4			164.4
Class A Common Stock, $5 par value: authorized 27,000,000 shares; issued 26,247,055 and 26,313,351								131.2			131.6
Common Stock, $1 par value: authorized 240,000,000 shares; issued 164,460,537 and 164,394,241								164.5			164.4
Capital in excess of par value		476.1			469.3			484.4			477.6
Retained earnings		1,531.2			1,350.7			1,724.5			1,593.0
Accumulated other comprehensive loss		(324.8	)		(313.4	)		(340.7	)		(363.2	)
Treasury stock at cost		(453.1	)		(360.5	)		(550.2	)		(488.1	)

Total Stockholders’ Equity		1,525.6			1,442.3			1,613.7			1,515.3

Total Liabilities and Stockholders’ Equity	$	2,824.4		$	2,629.2		$	2,984.0		$	2,891.0


See accompanying notes to unaudited condensed consolidated financial statements.


	Nine Months Ended September 30,						Six Months Ended June 30,
	2016			2015			2017			2016
Operating Activities
Net earnings	$	243.8		$	203.1		$	180.1		$	160.6
Adjustments to reconcile net earnings to cash provided by (used in) operating activities:
Depreciation and amortization		48.7			47.3			34.3			32.1
Pension (income) expense		(4.8	)		0.1
Stock based compensation expense		8.1			7.8			7.2			6.9
Net changes in operating assets and liabilities, net of acquisitions:
Net changes in operating assets and liabilities:
Current assets and liabilities		(23.5	)		(6.4	)		(149.9	)		(44.8	)
Noncurrent assets and liabilities		(7.8	)		(13.8	)		1.5			0.3

Cash Provided by Operating Activities - continuing operations		264.5			238.1
Cash Used in Operating Activities - discontinued operations		(0.9	)		(1.0	)
Cash Provided by Operating Activities								73.2			155.1

Cash Provided by Operating Activities		263.6			237.1
Investing Activities
Capital expenditures		(58.7	)		(53.1	)		(36.3	)		(37.7	)
Acquisitions		(90.5	)		—
Investments in marketable securities		(415.5	)		(322.2	)		(284.4	)		(310.1	)
Net proceeds from sale of marketable securities		318.2			213.8			284.5			244.2

Cash Used in Investing Activities		(246.5	)		(161.5	)		(36.2	)		(103.6	)

Financing Activities
Term debt (repaid) incurred		(13.2	)		61.7
Long-term debt incurred (repaid)		99.7			(22.4	)
Long-term debt incurred								51.3			32.1
Common stock repurchases		(100.2	)		(104.3	)		(66.2	)		(82.2	)
Net proceeds from stock option activity		5.5			3.8			2.7			4.6
Dividends paid		(63.2	)		(50.9	)		(48.6	)		(42.2	)

Cash Used in Financing Activities		(71.4	)		(112.1	)
Cash Used In Financing Activities								(60.8	)		(87.7	)

Net decrease in cash and cash equivalents		(54.3	)		(36.5	)		(23.8	)		(36.2	)
Cash and cash equivalents - beginning of period		323.6			319.4			330.4			323.6

Cash and Cash Equivalents - End of Period	$	269.3		$	282.9
							$	306.6		$	287.4

See accompanying notes to unaudited condensed consolidated financial statements.
Cash and Cash Equivalents - End of Period

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 are not necessarily indicative of the results expected for the full year. It is suggested that the accompanying condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016 filed with the SEC on February 17, ~~2016.~~

On April 11, 2016, the Company’s stockholders approved a proposal to increase the Company’s authorized shares of Common Stock and on September 7, 2016, the Company’s Board of Directors declared a two-for-one stock split of the Company’s Class A Common Stock and Common Stock (including treasury shares) in the form of a 100 percent stock dividend to stockholders of record on September 21, 2016 and payable on October 5, 2016. All references in the financial statements and footnotes to the number of shares outstanding, price per share amounts, and stock-based compensation data have been recast to reflect the split for all periods presented.

~~Certain other prior period amounts have been reclassified to conform to the 2016 presentation.~~2017.

In ~~August 2016,~~May 2017, the Financial Accounting Standards Board (FASB) amended Accounting ~~Standard~~Standards Codification (ASC) 718,Compensation – Stock Compensation(issued under Accounting Standards Update (ASU) 2017-09, “Scope of Modification Accounting”). This amendment clarifies when changes to the terms or conditions of share-based payment awards must be accounted for as a modification. Under this amendment, modification accounting must be used if three conditions are met: the fair value changes, the vesting conditions change, or the classification of the award changes due to the changes in terms or conditions. The amendment requires adoption on January 1, 2018 and permits early adoption. The Company does not expect that the adoption of ASU 2017-09 will have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

In March 2017, the FASB amended ASC 715,Compensation – Retirement Benefits(issued under ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”). This amendment changes the way net periodic benefit cost associated with employer-sponsored defined benefit plans is presented in the income statement. Under the amendment, the service cost component of net periodic benefit cost is included in the same lines in the income statement as other employee compensation costs and the other components of net periodic benefit cost must be presented separately outside of income from operations. The amendment requires adoption on January 1, 2018. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

In January 2017, the FASB amended ASC 350,Intangibles – Goodwill and Other (issued under ASU 2017-04, “Simplifying the Test for Goodwill Impairment”). The amendment simplifies the test for goodwill impairment by only requiring an entity to perform an annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount that the carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendment requires adoption on January 1, 2020. The Company does not expect that the adoption of ASU 2017-04 will have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

In October 2016, the FASB amended ASC 740,Income Taxes (issued under ASU 2016-16). This amendment requires that the income tax consequences of an intra-entity transfer of an asset other than inventory be recognized when the transfer occurs. The amendment requires adoption on January 1, 2018. This amendment is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings. The Company does not expect the adoption of amended ASU 2016-16 will have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

In August 2016, the FASB amended ASC 230,Statement of Cash Flows (issued under ~~Accounting Standards Update (ASU)~~ASU 2016-15, “Clarification of Certain Cash Receipts and Cash ~~Payments.”~~Payments”). This amendment clarifies reporting for contingent consideration payments made after a business combination depending on how soon after the acquisition the payments are made. The amendment requires adoption ~~for periods beginning~~on January 1, 2018 and permits early adoption. The Company ~~is in the process of determining whether~~does not expect the adoption of ASU 2016-15 will have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

~~In March 2016, the FASB amended ASC 718,~~~~Compensation - Stock Compensation~~ (issued under ASU 2016-09). This amendment simplified several aspects of the accounting for share-based payment transactions. The amendment required adoption for periods beginning January 1, 2017 and permitted early adoption. The Company adopted this amendment effective January 1, 2016.

The amendment required the benefits or deficiencies of tax deductions in excess of or less than the recognized compensation cost to be recorded as income tax benefits or expense in the Consolidated Statement of Earnings in the periods in which they occur. The amendment also

eliminated previous guidance that required unrecognized future excess income tax benefits to be considered used to repurchase shares in the calculation of diluted shares which resulted in lower diluted shares outstanding than the calculation under the amendment. The Company applied this guidance prospectively. As such, in the three months and nine months ended September 30, 2016, the Company recognized $0.2 million and $5.6 million, respectively, of discrete income tax benefits associated with excess tax benefits on settled stock based compensation awards and the Company’s diluted shares outstanding for the three and nine months ended September 30, 2016 increased as compared to the way it was calculated under previous guidance.

The amendment also required that cash paid by an employer to a taxing authority when shares are directly withheld for employee income tax withholding purposes be classified as financing activities in the consolidated statements of cash flows. As required, the Company applied this guidance retrospectively in the presentation of the consolidated statements of cash flows for the period beginning January 1, 2015 and, as a result, reclassified $5.8 million of cash used by operating activities to cash used by financing activities for the nine months ended September 30, 2015.

In February 2016, the FASB amended ASC 842,Leases (issued under ASU 2016-02). This amendment requires the recognition of lease assets and lease liabilities on the balance sheet for most leasing arrangements currently classified as operating leases. This amendment ~~is effective for periods beginning~~requires adoption on January 1, 2019 and permits early ~~adoption is permitted.~~adoption. The Company is in the process of determining whether the adoption of ASU 2016-02 will have a material impact on its consolidated balance sheets, ~~consolidated~~ statements of earnings or ~~consolidated statements of cash flows.~~

~~In November 2015, the FASB amended ASC 740,~~~~Income Taxes~~ (issued under ASU 2015-17). This amendment required that deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The amendment was effective for periods beginning January 1, 2016 and allowed either prospective adoption or retrospective adoption. The Company adopted ASU 2015-17 retrospectively and, as a result, has classified all deferred tax assets and liabilities as non-current on the Company’s consolidated balance sheets for all periods presented. Current deferred taxes of $40.5 million as of December 31, 2015 were reclassified to non-current deferred taxes on the Company’s consolidated balance sheet.

~~In July 2015, the FASB amended ASC 330,~~~~Inventory~~ (issued under ASU 2015-11, “Simplifying the Measurement of Inventory.”) This amendment requires inventory that is recorded using the first-in, first-out method to be measured at the lower of cost or net realizable value. ASU 2015-11 will be effective prospectively for the Company beginning January 1, 2017. The Company does not expect the adoption of ASU 2015-11 to have a significant impact on its consolidated balance sheets, consolidated statements of earnings or consolidated statements of cash flows.

In May 2014, the FASB issued ASC 606-10,Revenue from Contracts with Customers (issued under ASU 2014-09). ~~ASC 606-10~~ASU 2014-09 will replace all existing revenue recognition guidance when effective. In July 2015, the FASB approved a ~~one year~~one-year deferral of the effective date ~~to periods beginning~~resulting in required adoption on January 1, ~~2018, with early application permitted as of January 1, 2017. Either full retrospective adoption or modified retrospective adoption is allowed under ASC 606-10.~~2018. The Company is incompleting its review of its customer contracts and its analysis of the ~~process~~impact of ~~determining whether~~the disclosure requirements of ASU 2014-09. The Company does not anticipate that its pattern of revenue recognition will change as a result of the adoption of ~~ASC 606-10 will~~the new guidance. The Company expects to utilize the full retrospective method of adoption and does not expect the adoption of ASU 2014-09 to have ana material impact on its consolidated balance sheets, ~~consolidated~~ statements of earnings or ~~consolidated~~ statements of cash flows.

On August 8, 2016, the Company acquired 100 percent of the shares of Aquasana, Inc. (Aquasana), a Texas-based water treatment company. With the addition of Aquasana, the Company entered the U.S. water treatment market. Aquasana is included in the Company’s North America segment for reporting purposes.

The Company paid an aggregate cash purchase price of ~~$84.8~~$85.1 million, net of $1.9 million of cash acquired. In addition, the Company incurred acquisition-related costs of approximately $1.2 million and recorded a holdback liability to satisfy any potential obligations of the former owners of Aquasana to pay any adjustments to the purchase price. As of the acquisition date and June 30, 2017, the fair value of the holdback liability was $1.7 million. The Company expects to pay the holdback liability in full to the former owners of Aquasana in the third quarter of 2017.

The following table summarizes the ~~preliminary estimate~~allocation of the fair value of the assets acquired and liabilities assumed at the date of ~~acquisition for purposes of allocating the purchase price.~~acquisition. The ~~Company is in the process of finalizing the fair value estimates, therefore the allocation of the purchase price is subject to refinement. Of the preliminary~~ $30.0 million of acquired intangible assets was comprised of $21.5 million ~~was assigned to~~of trade names that are not subject to amortization, $8.3 million ~~was assigned to~~of customer ~~relationships which will be~~lists being amortized over ten years and ~~the remaining~~ $0.2 million ~~was assigned to~~of patents ~~which will be~~being amortized over ~~three~~five years.


August 8, 2016 (dollars in millions)
Current assets, net of cash acquired	$	7.3		$	7.3
Property, plant and equipment		2.7			2.7
Intangible assets		30.0			30.0
Goodwill		59.5			60.4

Total assets acquired		99.5			100.4
Current liabilities		(5.0	)		(7.1	)
Long-term liabilities		(9.7	)		(8.2	)

Total liabilities assumed		(14.7	)		(15.3	)

Net assets acquired	$	84.8		$	85.1

The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations have been included in the Company’s consolidated financial statements from August 8, 2016, the date of acquisition. Revenues and pre-tax loss associated with Aquasana included in the consolidated statement of earnings totaled $6.2 million and $(1.2) million, respectively which included $0.2 million of operating earnings less $1.2 million of acquisition-related costs and $0.2 of interest expense incurred by the Company resulting from the acquisition.

On August 26, 2016, the Company acquired certain assets, primarily inventory, and assumed a lease of a small electric water heater manufacturer serving the North America market. The Company paid a cash purchase price of $5.7 million for the assets. Under the purchase agreement, the Company agreed to make additional contingent payments ~~for~~related to the acquired assets if certain conditions are met over the next ten years. As of the acquisition date and June 30, 2017, the Company estimated the fair value of the contingent payments at $5.2 million and ~~recorded~~has a liability recorded for the contingent ~~consideration.~~

The following table presents the components of the Company’s inventory balances:


(dollars in millions)
	September 30, 2016			December 31, 2015			June 30, 2017			December 31, 2016
Finished products	$	118.0		$	85.7		$	138.5		$	114.1
Work in process		12.0			13.4			17.1			13.0
Raw materials		138.3			139.6			150.1			142.4

Inventories, at FIFO cost		268.3			238.7			305.7			269.5
LIFO reserve		(9.7	)		(15.8	)		(18.7	)		(18.4	)

Net inventory	$	258.6		$	222.9		$	287.0		$	251.1

The Company offers warranties on the sales of certain of its products and records an accrual for the estimated future claims. The following table presents the Company’s warranty liability activity.


	Three Months Ended September 30,
(dollars in millions)	2016			2015			Three Months Ended June 30,
Balance at July 1,	$	141.5		$	138.3
							2017			2016
Balance at April 1,							$	142.6		$	140.6
Expense		10.4			11.7			8.0			12.0
Claims settled		(8.9	)		(11.2	)		(9.8	)		(11.1	)

Balance at September 30,	$	143.0		$	138.8
Balance at June 30,							$	140.8		$	141.5


	Nine Months Ended September 30,
(dollars in millions)	2016			2015			Six Months Ended June 30,
							2017			2016
Balance at January 1,	$	139.4		$	136.2		$	140.9		$	139.4
Expense		35.0			38.1			20.4			24.4
Claims settled		(31.4	)		(35.5	)		(20.5	)		(22.3	)

Balance at September 30,	$	143.0		$	138.8
Balance at June 30,							$	140.8		$	141.5

The Company has a ~~$400~~$500 million multi-year multi-currency revolving credit agreement with ~~eight~~a group of nine banks, which expires on December ~~12, 2017.~~15, 2021. The facility has an accordion provision which allows it to be increased up to ~~$500~~$700 million if certain conditions (including lender approval) are satisfied.

Borrowings under bank credit lines and commercial paper borrowings are supported by the ~~$400~~$500 million revolving credit agreement. As a result of the long-term nature of this facility, the Company’s commercial paper and credit line borrowings are classified as long-term debt at ~~September~~June 30, ~~2016.~~2017. At its option, the Company either maintains cash balances or pays fees for bank credit and services.

On November 28, 2016, the Company issued an aggregate of $45 million in term notes in two tranches to two insurance companies. Principal payments commence in 2023 and 2028 and the notes mature in 2029 and 2034, respectively. The notes have interest rates of 2.87 percent and 3.10 percent, respectively. The proceeds received from the issuance of the notes were used to pay down borrowings under the Company’s revolving credit facility.

The numerator for the calculation of basic and diluted earnings per share is net earnings. The following table sets forth the computation of basic and diluted weighted-average shares used in the earnings per share calculations:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
Denominator for basic earnings per share - weighted average shares		174,409,789		177,396,392		175,019,605		178,177,130
Denominator for basic earnings per share – weighted average shares										172,992,419		174,961,720		173,185,177		175,327,862
Effect of dilutive stock options and share units		2,138,589		1,342,756		2,097,444		1,391,714		1,897,030		2,037,000		1,968,347		2,076,784

Denominator for diluted earnings per share		176,548,378		178,739,148		177,117,049		179,568,844		174,889,449		176,998,720		175,153,524		177,404,646

The Company adopted the A. O. Smith Combined Incentive Compensation Plan (the “Plan”) effective January 1, 2007. The Plan was reapproved by stockholders on April 16, 2012. The Plan is a continuation of the A. O. Smith Combined Executive Incentive Compensation Plan which was originally approved by stockholders in 2002. The number of shares available for granting of options or share units at ~~September~~June 30, ~~2016~~2017 was ~~3,268,580.~~2,895,234. Upon stock option exercise or share unit vesting, shares are issued from treasury stock.

Total stock based compensation expense recognized in the three months ended ~~September~~June 30, 2017 and 2016 ~~and 2015~~ was ~~$1.2~~$1.3 million and ~~$1.0~~$1.8 million, respectively. Total stock based compensation ~~expense~~ recognized in the ~~nine~~six months ended ~~September~~June 30, 2017 and 2016 ~~and 2015~~ was ~~$8.1~~$7.2 million and ~~$7.8~~$6.9 million, respectively.

The stock options granted in the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016 have three year pro rata vesting from the date of grant. Stock options are issued at exercise prices equal to the fair value of the Company’s Common Stock on the date of grant. For active employees, all options granted in ~~2016~~2017 and ~~2015~~2016 expire ten years after date of grant. The Company’s stock options are expensed ratably over the ~~three-year~~three year vesting period; however, included in ~~the~~ stock option expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016 was expense associated with the accelerated vesting of stock option awards for certain employees who either are retirement eligible or become retirement eligible during the vesting period. Stock based compensation expense attributable to stock options in the three months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016 was $0.5 million and ~~$0.5~~$0.9 million, respectively. Stock based compensation expense attributable to stock options in the ~~nine~~six months ended ~~September~~June 30, 2017 and 2016 ~~and 2015~~ was ~~$3.9~~$3.4 million and ~~$3.6~~$3.4 million, respectively.

Changes in option ~~awards,~~shares, all of which relate to the Company’s Common Stock, were as follows for the ~~nine~~six months ended ~~September~~June 30, ~~2016:~~2017:


	Weighted-Avg. Per Share Exercise Price		Number of Options			Average Remaining Contractual Life		Aggregate Intrinsic Value (dollars in millions)		Weighted-Avg. Per Share Exercise Price		Number of Options			Average Remaining Contractual Life		Aggregate Intrinsic Value (dollars in millions)
Outstanding at January 1, 2016	$	18.03		2,653,558
Outstanding at January 1, 2017										$	21.69		2,664,333
Granted		32.08		553,370							50.16		358,150
Exercised		14.01		(508,022	)						18.65		(468,944	)
Forfeited		28.99		(5,762	)						36.13		(3,640	)

Outstanding at September 30, 2016		21.64		2,693,144			7 years	$	73.8
Outstanding at June 30, 2017											26.22		2,549,899			7 years	$	75.8

Exercisable at September 30, 2016	$	16.11		1,626,562			6 years	$	53.6
Exercisable at June 30, 2017										$	19.31		1,666,017			6 years	$	61.0

The weighted-average fair value per option at the date of grant during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016 using the Black-Scholes option-pricing model was ~~$8.03~~$13.04 and ~~$8.58,~~$15.78, respectively. Assumptions were as follows:


	Nine Months Ended September 30,						Six Months Ended June 30,
	2016			2015			2017			2016
Expected life (years)		5.8			5.9			5.7			5.8
Risk-free interest rate		1.7	%		2.0	%		2.4	%		1.7	%
Dividend yield		1.3	%		1.0	%		1.0	%		1.3	%
Expected volatility		27.7	%		29.3	%		26.5	%		27.8	%

The expected lives of options for purposes of these models are based on historical exercise ~~behaviors.~~behavior. The risk-free interest rates for purposes of these models are based on the U.S. Treasury yield ~~curves~~curve in effect on the ~~dates~~date of grant for the respective expected lives of the ~~options.~~option. The expected dividend yields for purposes of these models are based on the dividends paid ~~on Common Stock~~ in the preceding four quarters divided by the grant date market value of the Common Stock. The expected volatility for purposes of these models are based on the historical volatility of the Common Stock.

Certain non-U.S.-based employees have been granted SARs. Each SAR award grants the employee the right to receive cash equal to the excess of the share price of the Company’s Common Stock on the date that a participant exercises such right over the grant date price of the ~~stock.~~Common Stock. SARs granted have three year pro rata vesting from the date of grant. SARs were issued at exercise prices equal to the fair value of the Company’s Common Stock on the date of grant and expire ten years from the date of grant. ~~Compensation expense for SARs is initially measured based on the~~The fair value ~~on the date of grant~~and compensation expense related to SARs are measured at each reporting period using the Black-Scholes option-pricing model, using assumptions similar to stock option awards. ~~SARs are subsequently remeasured at each reporting period based on a revised Black-Scholes value.~~ No SARs were granted in 2017 or 2016. As of ~~September~~June 30, ~~2016,~~2017, there were ~~24,940~~23,660 SARs outstanding and ~~8,320~~15,774 were exercisable. In the ~~nine~~six months ended ~~September~~June 30, ~~2016, 430~~2017, 427 SARs were exercised and ~~860~~853 SARs were forfeited. InStock based compensation expense was minimal in the ~~first nine~~three and six months ~~of 2015, the Company granted 26,230 cash-settled SARs.~~ended June 30, 2017 and 2016.

Participants may also be awarded shares of restricted stock or share units under the Plan. The Company granted ~~160,428~~107,755 and ~~152,070~~155,480 share units under the ~~Plan~~plan in the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~2016, respectively. The share units were valued at ~~$5.2~~$5.4 million and ~~$4.7~~$4.9 million at the ~~dates~~date of issuance in ~~2016~~2017 and ~~2015,~~2016, respectively, based on the ~~prices~~price of the Company’s Common Stock at the ~~dates~~date of grant. The share units are recognized as compensation expense ratably over the three-year vesting period; however, included in share unit expense in the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016 was expense associated with accelerated vesting of share unit awards for certain employees who either are retirement eligible or will become retirement eligible during the vesting period. Stock based compensation expense attributable to share units of ~~$0.7~~$0.8 million and ~~$0.5~~$0.9 million was recognized in the three months ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~2016, respectively. Stock based compensation expense attributable to share units of ~~$4.2~~$3.8 million and $3.5 million was recognized in ~~each of~~ the ~~nine month periods~~six months ended ~~September~~June 30, 2017 and 2016, ~~and 2015.~~respectively. Certain non-U.S.-based employees receive the cash value of vested shares at the vesting date in lieu of shares.

A summary of share unit activity under the ~~Plan~~plan is as follows for the ~~nine~~six months ended ~~September~~June 30, ~~2016:~~2017:


	Number of Units			Weighted-Average Grant Date Value		Number of Units			Weighted-Average Grant Date Value
Issued and unvested at January 1, 2016		658,524		$	22.15
Issued and unvested at January 1, 2017							544,055		$	27.35
Granted		160,428			32.21		107,755			50.16
Vested		(268,306	)		17.39		(213,863	)		23.25
Forfeited		(3,660	)		29.32		(3,010	)		32.73

Issued and unvested at September 30, 2016		546,986		$	27.39
Issued and unvested at June 30, 2017							434,937			34.98

The following table presents the components of the Company’s net pension ~~expense:~~income.


(dollars in millions)
	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015			2017			2016			2017			2016
Service cost	$	0.4		$	0.5		$	1.3		$	1.5		$	0.5		$	0.4		$	0.9		$	0.9
Interest cost		7.7			9.4			23.0			28.2			7.5			7.7			14.9			15.3
Expected return on plan assets		(13.9	)		(14.3	)		(41.5	)		(43.1	)		(14.3	)		(13.8	)		(28.7	)		(27.6	)
Amortization of unrecognized loss		4.4			4.8			13.2			14.3			4.4			4.5			8.8			8.8
Amortization of prior service cost		(0.3	)		(0.3	)		(0.8	)		(0.8	)		(0.3	)		(0.2	)		(0.2	)		(0.5	)

Defined benefit plan (income) expense	$	(1.7	)	$	0.1		$	(4.8	)	$	0.1
Defined benefit plan income													$	(2.2	)	$	(1.4	)	$	(4.3	)	$	(3.1	)

The Company ~~did~~was not required to make a contribution to its U.S. pension plan in ~~2015.~~2016 but made a voluntary $30 million contribution. The Company is not required to make a contribution in ~~2016 but made a voluntary $30 million contribution in the three months ended September 30, 2016.~~2017.

The Company is comprised of two reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas, gas tankless and electric water heaters as well as water treatment products. Both segments primarily manufacture and market in their respective regions of the world. The North America segment also manufactures and globally markets specialty commercial water heating equipment, condensing and non-condensing boilers, residential water treatments products and water system tanks. The ~~Company~~Rest of World segment also manufactures and markets in-home air purification products in China.

The following table presents the Company’s ~~results of operations by segment:~~segment results:


(dollars in millions)
	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015			2017			2016			2017			2016
Net sales
North America	$	450.8		$	417.4		$	1,307.5		$	1,289.3		$	470.7		$	432.8		$	958.0		$	856.7
Rest of World		240.3			217.1			697.6			634.3			272.8			239.8			532.3			457.3
Inter-segment sales		(7.2	)		(9.4	)		(17.3	)		(26.5	)
Inter-segment														(5.3	)		(5.6	)		(12.1	)		(10.1	)

	$	683.9		$	625.1		$	1,987.8		$	1,897.1		$	738.2		$	667.0		$	1,478.2		$	1,303.9

Operating earnings
Segment earnings
North America	$	100.5		$	90.5		$	296.5		$	247.7		$	109.2		$	104.2		$	213.4		$	196.1
Rest of World		31.1			27.4			90.9			84.5			32.5			33.0			65.0			59.8
Inter-segment														(0.1	)		—			(0.2	)		—

		131.6			117.9			387.4			332.2			141.6			137.2			278.2			255.9
Corporate expense		11.1			9.1			35.6			33.0			(11.1	)		(11.2	)		(25.1	)		(24.6	)
Interest expense		2.1			1.6			5.7			6.0			(2.5	)		(1.9	)		(4.7	)		(3.6	)

Earnings before income taxes		118.4			107.2			346.1			293.2			128.0			124.1			248.4			227.7
Provision for income taxes		35.2			33.6			102.3			90.1			35.6			37.0			68.3			67.1

Net earnings	$	83.2		$	73.6		$	243.8		$	203.1		$	92.4		$	87.1		$	180.1		$	160.6

ASC 820,Fair Value Measurements, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring basis or nonrecurring basis. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Assets and liabilities measured at fair value are based on the market approach which are prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

The following table presents assets measured at fair value on a recurring ~~basis:~~basis.


(dollars in millions)
Fair Value Measurement Using	September 30, 2016		December 31, 2015			June 30, 2017		December 31, 2016
Quoted prices in active markets for identical assets (Level 1)	$	409.1	$	323.9		$	434.7	$	424.5
Significant other observable inputs (Level 2)		—		(0.3	)

Total assets measured at fair value	$	409.1	$	323.6

There were no changes in the Company’s valuation techniques used to measure fair values on a recurring basis during the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017.

ASC 815,Derivatives and Hedging, as amended, requires that all derivative instruments be recorded on the balance sheet at fair value and establishes criteria for designation and effectiveness of the hedging relationships. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as a part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based upon the exposure hedged, as a fair value hedge, a cash flow hedge, or a hedge of a net investment in a foreign operation.

The Company designates that all of its hedging instruments are cash flow hedges. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive loss, net of tax, and is reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The amount by which the cumulative change in the value of the hedge more than offsets the cumulative change in the value of the hedged item (i.e., the ineffective portion) is recorded in earnings, net of tax, in the period the ineffectiveness occurs.

The Company utilizes certain derivative instruments to enhance its ability to manage currency exposure as well as raw materials price risk. Derivative instruments are entered into for periods consistent with the related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into contracts for speculative purposes. The contracts are executed with major financial institutions with no credit loss anticipated for failure of the counterparties to perform.

The Company is exposed to foreign currency exchange risk as a result of transactions in currencies other than the functional currency of certain subsidiaries. The Company utilizes foreign currency forward purchase and sale contracts to manage the volatility associated with foreign currency purchases, sales and certain intercompany transactions in the normal course of business. Currencies for which the Company utilizes foreign currency forward contracts include the British pound, Canadian dollar, Euro and Mexican peso.

Gains and losses on these instruments are recorded in accumulated other comprehensive loss, net of tax, until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive loss to the consolidated statement of earnings. The assessment of effectiveness for forward contracts is based on changes in the forward rates. These hedges have been determined to be effective.

The majority of the amounts in accumulated other comprehensive loss for cash flow hedges are expected to be reclassified into earnings within one year.

The following table summarizes, by currency, the contractual amounts of the Company’s foreign currency forward contracts.


(dollars in millions)
	September 30,								June 30,
	2016				2015				2017				2016
	Buy		Sell		Buy		Sell		Buy		Sell		Buy		Sell
British pound	$	—	$	0.2	$	—	$	1.1	$	—	$	0.6	$	—	$	0.5
Canadian dollar		—		77.2		—		64.9		—		63.4		—		62.7
Euro		6.7		0.5		9.2		1.9		13.1		0.9		12.9		0.9
Mexican peso		13.8		—		16.9		—		10.7		—		13.2		—

Total	$	20.5	$	77.9	$	26.1	$	67.9	$	23.8	$	64.9	$	26.1	$	64.1

In addition to entering into supply arrangements in the normal course of business, the Company also ~~enters~~entered into futures contracts to fix the cost of certain raw material purchases, principally copper and steel, with the objective of minimizing changes in cost due to market price fluctuations. The Company’s hedging strategy for achieving this objective is to purchase commodities futures contracts on the open market of the London Metals Exchange (LME) or over the counter contracts based on the LME for copper. ~~The Company purchased steel~~Steel futures contracts are purchased on the New York Metals Exchange (NYMEX).

With NYMEX, the Company is required to make cash deposits on unrealized losses on steel derivative contracts.

The after-tax gains and losses on the effective portion of the copper and steel hedge contracts as of ~~September~~June 30, ~~2016~~2017 were recorded in accumulated other comprehensive loss and will be reclassified into cost of products sold in the ~~periods~~period in which the underlying ~~transactions are~~transaction is recorded in earnings. The after-tax gains and losses on the effective portion of the contracts will be reclassified within one year. Contractual amounts of the Company’s commodities futures contracts were immaterial as of ~~September~~June 30, ~~2016.~~2017.

The following tables present the impact of derivative contracts on the Company’s financial statements.


(dollars in millions)									(dollars in millions)
		Balance Sheet Location	September 30, 2016			December 31, 2015				Balance Sheet Location	June 30, 2017			December 31, 2016
Foreign currency contracts		Other current assets	$	0.6		$	3.6			Other current assets	$	1.2		$	1.9
		Accrued liabilities		(1.2	)		(1.3	)		Accrued liabilities		(0.3	)		(2.0	)
Commodities contracts		Other current assets		0.8			—			Other current assets		0.3			0.8
		Accrued liabilities		(1.1	)		(0.3	)		Accrued liabilities		—			(0.3	)

Total derivatives designated as hedging instruments	Total derivatives designated as hedging instruments		$	(0.9	)	$	2.0				$	1.2		$	0.4

The effect of derivatives designated as hedging instruments on the ~~consolidated~~ statement of earnings is as follows:


Nine Months Ended September 30 (dollars in millions):
Six Months Ended June 30 (dollars in millions):																																			��
Derivatives in ASC 815 cash flow hedging relationships	Amount of gain (loss) recognized in OCI on derivative (effective portion)						Location of gain (loss) reclassified from accumulated OCI into earnings (effective portion)		Amount of gain (loss) reclassified from accumulated OCI into earnings (effective portion)						Location of gain (loss) recognized in earnings on derivative (ineffective portion)		Amount of gain (loss) recognized in earnings on a derivative (ineffective portion)				Amount of gain (loss) recognized in OCI on derivative (effective portion)					Location of gain (loss) reclassified from accumulated OCI into earnings (effective		Amount of gain (loss) reclassified from accumulated OCI into earnings (effective portion)					Location of gain (loss) recognized in earnings on derivative (ineffective		Amount of gain (loss) recognized in earnings on a derivative (ineffective portion)
	2016			2015					2016			2015					2016		2015		2017		2016			portion)		2017		2016			portion)		2017		2016
Foreign currency contracts	$	(4.1	)	$	5.7			Cost of products sold	$	(1.1	)	$	4.6			N/A	$	—	$	—	$	1.5	$	(4.8	)		Cost of products sold	$	0.6	$	(0.7	)		N/A	$	—	$	—
Commodities contracts		0.7			(0.5	)		Cost of products sold		0.7			(0.3	)		Cost of products sold		—		—		0.1		1.7			Cost of products sold		0.1		—			Cost of products sold		—		—

	$	(3.4	)	$	5.2				$	(0.4	)	$	4.3				$	—	$	—	$	1.6	$	(3.1	)			$	0.7	$	(0.7	)			$	—	$	—

The effective income tax rates for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 were ~~29.7~~27.8 percent and ~~29.6~~27.5 percent, respectively. The Company estimates that its annual effective income tax rate for the full year 2017 will be approximately 28.5 percent, assuming no material changes to existing tax codes. The effective income tax rates for the three and ~~nine~~six months ended ~~September~~June 30, ~~2015~~2016 were ~~31.3~~29.8 percent and ~~30.7~~29.5 percent, respectively. The full year effective income tax rate in 2016 was 29.4 percent. The lower effective income tax rate in the ~~first nine~~three and six months ~~of 2016~~ended June 30, 2017 compared to the prior year periods was primarily due to ~~the early adoption of~~lower state income taxes and a ~~new accounting standard for share based compensation beginning January 1, 2016.~~change in geographic earnings mix.

As of ~~September~~June 30, ~~2016,~~2017, the Company had ~~$2.6~~$4.2 million of unrecognized tax benefits of which ~~$0.5~~$0.6 million would affect its effective income tax rate if recognized. The Company recognizes potential interest and penalties related to unrecognized tax benefits as a component of income tax expense.

The Company’s U.S. federal income tax returns for ~~2014 and 2015~~2014-2016 are subject to audit. The Company is subject to state and local income tax audits for tax years ~~2000-2015.~~2001-2016. The Company is ~~also~~ subject to non-U.S. income tax examinations for years ~~2007-2015.~~2008-2016.


(dollars in millions)
	Three Months Ended September 30,						Three Months Ended June 30,
	2016			2015			2017			2016
Cumulative foreign currency translation
Balance at beginning of period	$	(47.9	)	$	(6.9	)	$	(71.9	)	$	(30.8	)
Other comprehensive loss before reclassifications		(3.5	)		(17.8	)
Other comprehensive income before reclassifications								13.6			(17.1	)

Balance at end of period		(51.4	)		(24.7	)		(58.3	)		(47.9	)

Unrealized net (loss) gain on cash flow derivatives
Unrealized net gain on cash flow derivatives
Balance at beginning of period		(0.3	)		0.9			1.3			(0.8	)
Other comprehensive loss before reclassifications		—			1.6
Realized gains on derivatives reclassified to cost of products sold (net of tax provision of $0.2 and $0.7 in 2016 and 2015, respectively)		(0.2	)		(1.0	)
Other comprehensive income (loss) before reclassifications								0.2			(0.1	)
Realized (gains) losses on derivatives reclassified to cost of products sold (net of income tax provision (benefit) of $0.5 and ($0.4) in 2017 and 2016, respectively)								(0.7	)		0.6

Balance at end of period		(0.5	)		1.5			0.8			(0.3	)

Pension liability
Balance at beginning of period		(275.3	)		(270.0	)		(281.6	)		(272.7	)
Other comprehensive loss before reclassifications		(0.1	)		—
Other comprehensive (loss) income before reclassifications								(4.1	)		(5.2	)
Amounts reclassified from accumulated other comprehensive loss:⁽¹⁾		2.5			2.7			2.5			2.6

Balance at end of period		(272.9	)		(267.3	)		(283.2	)		(275.3	)

Accumulated other comprehensive loss, end of period	$	(324.8	)	$	(290.5	)	$	(340.7	)		(323.5	)

⁽¹⁾Amortization of pension items:
Actuarial losses	$	4.4	⁽²⁾	$	4.8	⁽²⁾	$	4.4	⁽²⁾	$	4.5	⁽²⁾
Prior year service cost		(0.3	)⁽²⁾		(0.3	)⁽²⁾		(0.3	)⁽²⁾		(0.2	)⁽²⁾

		4.1			4.5			4.1			4.3
Income tax benefit		(1.6	)		(1.8	)		(1.6	)		(1.7	)

Reclassification net of income tax benefit	$	2.5		$	2.7		$	2.5		$	2.6


⁽²⁾ These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 8 - Pensions for additional details


(dollars in millions)
	Nine Months Ended September 30,						Six Months Ended June 30,
	2016			2015			2017			2016
Cumulative foreign currency translation
Balance at beginning of period	$	(39.4	)	$	3.3		$	(79.2	)	$	(39.4	)
Other comprehensive loss before reclassifications		(12.0	)		(28.0	)		20.9			(8.5	)

Balance at end of period		(51.4	)		(24.7	)		(58.3	)		(47.9	)

Unrealized net gain on cash flow derivatives
Balance at beginning of period		1.2			0.9			0.2			1.2
Other comprehensive (loss) income before reclassifications		(1.9	)		3.2
Realized losses (gains) on derivatives reclassified to cost of products sold (net of tax (benefit) provision of $(0.2) and $1.7 in 2016 and 2015, respectively)		0.2			(2.6	)
Other comprehensive income (loss) before reclassifications								1.0			(1.9	)
Realized (gains) losses on derivatives reclassified to cost of products sold (net of income tax provision (benefit) of $0.3 and ($0.3) in 2017 and 2016, respectively)								(0.4	)		0.4

Balance at end of period		(0.5	)		1.5			0.8			(0.3	)

Pension liability
Balance at beginning of period		(275.2	)		(276.2	)		(284.2	)		(275.2	)
Other comprehensive (gain) loss before reclassifications		(5.3	)		0.7
Other comprehensive (loss) income before reclassifications								(4.1	)		(5.2	)
Amounts reclassified from accumulated other comprehensive loss:⁽¹⁾		7.6			8.2			5.1			5.1

Balance at end of period		(272.9	)		(267.3	)		(283.2	)		(275.3	)

Accumulated other comprehensive loss, end of period	$	(324.8	)	$	(290.5	)	$	(340.7	)	$	(323.5	)

⁽¹⁾Amortization of pension items:
Actuarial losses	$	13.2	⁽²⁾	$	14.3	⁽²⁾	$	8.8	⁽²⁾	$	8.8	⁽²⁾
Prior year service cost		(0.8	)⁽²⁾		(0.8	)⁽²⁾		(0.2	)⁽²⁾		(0.5	)⁽²⁾

		12.4			13.5			8.6			8.3
Income tax benefit		(4.8	)		(5.3	)		(3.4	)		(3.2	)

Reclassification net of income tax benefit	$	7.6		$	8.2		$	5.2		$	5.1


⁽²⁾ These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 8 - Pensions for additional details

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Company is comprised of two reporting segments: North America and Rest of World. Our Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas, gas tankless and electric water heaters, as well as water treatment products. Both segments primarily manufacture and market in their respective region of the world. Our North America segment also manufactures and globally markets specialty commercial water heating equipment, condensing and non-condensing boilers, residential water treatment products and water systems tanks. WeOur Rest of World segment also ~~manufacture~~manufactures and ~~market~~markets in-home air purifier products in China.

Sales in our North America segment increased approximately ~~eight~~nine percent in the ~~third~~second quarter of ~~2016~~2017 over the same period last year primarily driven ~~primarily~~ by higher volumes of commercial water heaters and boilers in the U.S. and pricing actions in August 2016 related to steel cost increases and inflationary pressure on other input costs. Aquasana, which we acquired in August 2016, added $13.0 million to segment sales in the second quarter of 2017.

We project our sales in the U.S. will grow in 2017 compared to 2016 due to higher residential and commercial water ~~heaters. On August 8, 2016, we entered the U.S. water treatment market by acquiring Aquasana. Aquasana is included in our North America segment~~heater volumes resulting from industry-wide new construction growth and ~~added $6.2 million~~expansion of ~~sales in that segment.~~replacement demand. We expect ~~slower~~sales of Lochinvar-branded products to grow eight percent in 2017 driven by double-digit commercial boiler sales growth ~~in our Lochinvar-branded sales than we anticipated earlier in 2016. Our Lochinvar-branded boiler products have historically grown as a result of the transition from lower efficiency boilers~~due to ~~higher efficiency boilers,~~ new product introductions and market share gains. In 2016, we continue to expect our condensing boilers sales to grow at a rate of approximately ten percent. However, this sales growth will be offset by declines in Lochinvar-branded water heater and non-condensing boiler volumes. This likely will result in minimal Lochinvar-branded product sales growth in ~~2016, which is below~~sales of energy efficient products. We expect Aquasana to incrementally add nearly $40 million to our ~~most recent growth expectations of six percent.~~full year 2017 sales.

Sales in our Rest of World segment grew approximately 1114 percent in the ~~third~~second quarter of ~~2016,~~2017 compared to the same period last year as a result of 1115 percent sales growth in China. China sales in local currency terms grew approximately 1720 percent in the ~~third~~second quarter ~~compared~~driven by higher demand for our consumer products, led by water treatment and air purification, and pricing actions due to ~~the same period last year.~~ higher steel and other costs.

We expect full year ~~2016~~2017 sales in China to grow compared to 2016 at a rate ~~in excess~~ of 16almost 17 percent in local currency terms driven by expected continued overall water heater market growth, market share gains, ~~improved product mix~~higher average selling prices and ~~growth in sales of~~ water treatment ~~products~~product sales growth at a rate significantly higher than 1615 percent. Our sales in India were approximately $18 million last year and we expect sales in India to grow over 30 percent in 2017.

~~We expect to complete the conversion of nearly~~Combining all of ~~our North American plant sites~~these factors, we expect total company sales growth of between ten percent and 11 percent in 2017 compared to our new enterprise resource planning (ERP) system by the end of 2016. We project expenses related to our ERP implementation to be approximately $25 million in 2016, an increase over the $16 million of expenses in 2015 due to a larger number of scheduled implementation events in 2016. We estimate that our fourth quarter 2016 ERP expenses will be approximately $7 million higher than the same period last year.

On April 11, 2016, our stockholders approved a proposal to increase our authorized shares of Common Stock and on September 7, 2016, our Board of Directors declared a two-for-one stock split of our Class A Common Stock and Common Stock (including treasury shares) in the form of a 100 percent stock dividend to stockholders of record on September 21, 2016 and ~~payable on October 5, 2016. All references~~between 11.5 percent and 12.5 percent in the Management’s Discussion and Analysis of Financial Condition and Results of Operations to the number of shares outstanding and price per share amounts have been recast to reflect the split for all periods presented.local currency terms.

~~THIRD~~SECOND QUARTER AND FIRST ~~NINE~~SIX MONTHS OF ~~2016~~2017 COMPARED TO ~~2015~~2016

Sales for the ~~third~~second quarter of ~~2016~~2017 were ~~$683.9~~$738.2 million or approximately ~~nine~~11 percent higher than sales of ~~$625.1~~$667.0 million in the ~~third~~second quarter of ~~2015.~~2016. Sales in the first ~~nine~~six months of ~~2016~~2017 increased to ~~$1,987.8~~$1,478.2 million from ~~$1,897.1~~$1,303.9 million in the same period last year. Excluding the impact of the ~~stronger~~appreciation of the U.S. dollar ~~measured~~ against the Chinese ~~and Canadian currencies,~~currency, sales increased approximately 1112 percent and 15 percent in the ~~third~~second quarter and first six months of ~~2016~~2017, respectively, compared to the prior year periods. China sales grew approximately 20 percent and ~~seven~~23 percent in local currency in the second quarter and first ~~nine~~six months of ~~2016~~2017, respectively, compared to prior ~~periods. The increase in sales in the third quarter of 2016 was~~periods primarily due to higher sales of water ~~heaters~~treatment and water treatment products in China as well as higher residential and commercial volumes of water heaters in the U.S. The increase in sales the first nine months of 2016 was primarily due to higher sales of water heaters and water treatment products in China as well as higher prices in the U.S. and Canada that were partially offset by lower residential volumes of water heaters in the U.S.air purification products.

Gross profit margin in the ~~third~~second quarter of ~~2016~~2017 of 41.4 percent was ~~higher~~lower than the gross profit margin of ~~40.9~~42.5 percent in the ~~third~~second quarter of ~~2015. Gross margin in the third quarter of 2016 benefitted from higher volumes in China and the U.S.~~2016. Gross profit margin in the first ~~nine~~six months of ~~2016 increased~~2017 decreased to ~~41.7~~41.1 percent from ~~39.4~~41.9 percent in the first ~~nine~~six months of ~~2015. Gross margin~~2016. Margins in the second quarter and first ~~nine~~six months of ~~2016 benefitted from~~2017 were impacted by significantly higher ~~volumes in China and higher~~steel prices ~~on water heaters in the U.S. and Canada as well as lower steel costs globally.~~that more than offset pricing actions announced earlier this year.

Selling, general and administrative (SG&A) expenses in the ~~third~~second quarter and first ~~nine~~six months of ~~2016~~2017 increased by ~~$15.7~~$17.3 million and ~~$28.5~~$40.0 million, respectively, as compared to the ~~same periods last year.~~prior year periods. The increase in SG&A expenses in ~~both periods in 2016~~the second quarter and first six months of 2017 was primarily due to higher selling and advertising ~~and engineering costs in~~expenses to support of increased volumes, brand building and the expansion of water treatment and air purification retail outlets in China.

Interest expense in the ~~third~~second quarter of ~~2016~~2017 was ~~$2.1~~$2.5 million compared to ~~$1.6~~$1.9 million in the same period last year. Interest expense in the first ~~nine~~six months of ~~2016~~2017 was ~~$5.7~~$4.7 million compared to ~~$6.0~~$3.6 million in the same period last year. The increase in interest expense in the ~~third~~second quarter and first six months of ~~2016~~2017 compared to prior year periods was primarily ~~resulted from~~due to higher interest rates as well as higher overall debt ~~incurred relative~~levels primarily related to ~~the acquisition of~~share repurchases and our Aquasana ~~for approximately $85 million.~~acquisition.

Other income was $1.9 million in the ~~third~~second quarter of ~~2016,~~2017, down ~~$0.3~~from $2.3 million ~~from~~in the same period last year. Other income in the first ~~nine~~six months of ~~2016~~2017 was ~~$6.2~~$4.3 million, ~~down from $7.6 million in~~equal to the first ~~nine~~six months of ~~2015.~~2016. The decrease in other income in the ~~third~~second quarter ~~and first nine months~~ of ~~2016~~2017 was primarily due to ~~decreased~~higher currency and translation losses that were partially offset by higher interest ~~income as compared to the same periods last year.~~income.

Our pension costs and credits are developed from actuarial valuations. The valuations reflect key assumptions regarding, among other things, discount rates, expected return on assets, retirement ages, and years of service. We consider current market conditions including changes in interest rates in making these assumptions. Our assumption for the expected rate of return on plan assets is 7.5 percent in ~~2016, compared to 7.75 percent in 2015.~~2017, consistent with 2016. The discount rate used to determine net periodic pension costs ~~increased~~decreased to ~~4.41~~4.15 percent in ~~2016~~2017 from ~~4.05~~4.40 percent in ~~2015. We recognized pension~~2016. Pension income for the first half of 2017 was $4.3 million compared to $3.1 million in the first ~~nine months~~half of 2016 of $4.8 million compared to $0.1 million of pension expense in the first nine months of 2015. As of December 31, 2015, we changed the method we used to estimate the service cost and interest components of net periodic benefit cost for our pension plan and post-retirement benefit plan. The change resulted in an approximate $5.4 million decrease in service and interest expenses in the nine months ended September 30, 2016. Our pension ~~income/expense~~income is reflected in cost of products sold and SG&A ~~expense.~~expenses.

Our effective income tax rates for the ~~third~~second quarter and first ~~nine~~six months of ~~2016~~2017 were ~~29.7~~27.8 percent and ~~29.6~~27.5 percent, respectively. Our effective income tax rates for the ~~third~~second quarter and first ~~nine~~six months of ~~2015~~2016 were ~~31.3~~29.8 percent and ~~30.7~~29.5 percent, respectively. The lower effective income tax ~~rate~~rates in the second quarter and first ~~nine~~six months of ~~2016~~2017 compared to the same ~~period~~periods last year ~~was~~were primarily due to ~~our early adoption of a new accounting standard for share-based compensation.~~lower state income taxes and geographic earnings mix. We estimate that our ~~annual~~ effective income tax rate for the full year ~~2016~~2017 will be approximately 3028.5 percent, ~~compared~~assuming no material changes to ~~29.7 percent for the full year 2015.~~existing tax codes.

Sales in ~~our~~the North America segment were ~~$450.8~~$470.7 million in the ~~third~~second quarter of ~~2016~~2017 or ~~$33.4~~$37.9 million higher than sales of ~~$417.4~~$432.8 million in the ~~third~~second quarter of ~~2015.~~2016. Sales for the first ~~nine~~six months of ~~2016~~2017 were ~~$1,307.5~~$958.0 million or ~~$18.2~~$101.3 million higher than sales of ~~$1,289.3~~$856.7 million in the same period last year. The ~~increased~~increases in sales in ~~the third quarter of 2016~~2017 were primarily due to higher volumes of ~~residential and commercial~~ water heaters in the U.S. ~~The increased~~and Canada and pricing actions in August 2016 related to steel cost increases and inflationary pressure on other input costs. Sales in the second quarter of 2017 also benefitted from higher boiler sales. Aquasana, acquired in August 2016, added $13.0 million and $23.3 million to North America sales in the second quarter and first ~~nine~~half of 2017, respectively.

North America segment earnings were $109.2 million in the second quarter of 2017 or approximately five percent higher than segment earnings of $104.2 million in the same period of 2016. Segment earnings in the first six months of 2017 were $213.4 million or approximately nine percent higher than segment earnings of $196.1 million in the first six months of 2016. The higher segment earnings in both periods of 2017 compared to 2016 were primarily due to higher ~~prices~~sales of water heaters in the U.S. and Canada ~~for residential~~ and ~~commercial water heaters~~higher prices that were partially offset by ~~lower residential volumes of water heaters.~~significantly higher steel and other input costs. The ~~August 8, 2016 acquisition of Aquasana added $6.2 million of water treatment sales to our North America segment.~~

~~North America operating earnings were $100.5 million in the third~~second quarter of ~~2016 or approximately 11 percent~~2017 also benefitted from higher than operating earnings of $90.5 million in the same period of 2015. Operating earnings in the first nine months of 2016 were $296.5 million or approximately 20 percent higher than operating earnings of $247.7 million in the first nine months of 2015. Operatingboiler sales. Segment margin of ~~22.3~~23.2 percent in the ~~third~~second quarter of ~~2016~~2017 was ~~higher~~lower than ~~21.7~~24.1 percent in the same period last year. ~~Operating~~Segment margin of ~~22.7~~22.3 percent in the first ~~nine~~six months of ~~2016~~2017 was ~~higher~~lower than ~~19.2~~22.9 percent in the same period in ~~2015.~~2016. The ~~higher operating earnings and operating~~decreased segment margin in ~~third~~both the second quarter and first half of ~~2016 were~~2017 as compared to the same periods last year was primarily due to higher ~~residential~~steel prices and ~~commercial volumes~~the impact of ~~water heaters in~~newly acquired Aquasana, which has lower operating margins than the U.S. The higher operating earnings and operating margin in first nine months of 2016 were primarily due to higher prices in the U.S. and Canada and lower steel costs that were partially offset by lower residential volumes of water heaters.segment average. We expect ~~our~~ full year ~~operating~~segment margin to be between 21.75 and 22.0 percent in ~~2016.~~2017, which is slightly lower than last year due to lower Aquasana operating margins and continued volatility in steel prices.

Sales in ~~our~~the Rest of World segment were ~~$240.3~~$272.8 million in the ~~third~~second quarter of ~~2016~~2017 or ~~$23.2~~$33.0 million higher than sales of ~~$217.1~~$239.8 million in the ~~third~~second quarter of ~~2015.~~2016. Sales in the first ~~nine~~six months of ~~2016~~2017 were ~~$697.6~~$532.3 million or ~~$63.3~~$75.0 million higher than sales of ~~$634.3~~$457.3 million in the first ~~nine~~six months of ~~2015. Excluding the negative impact of currency translation,~~2016. China sales ~~in China~~ grew 17approximately 20 percent and 23 percent in ~~both~~local currency in the ~~third~~second quarter and first ~~nine~~six months of 2016, respectively, due to higher ~~sales~~demand for the majority of ~~water heaters and~~our consumer products in the region, led by water treatment and air purification products. A. O. Smith branded water treatment products grew 40 percent in local currency in the second quarter of 2017 and first six months of 2017. Air purification products sales quadrupled to $10 million in the second quarter of 2017 as compared to the same period last year. Sales in the second quarter of 2017 also benefitted from pricing actions announced earlier this year related to higher steel and other costs.

Rest of World ~~operating~~segment earnings were ~~$31.1~~$32.5 million in the ~~third~~second quarter of ~~2016 or approximately 14 percent higher~~2017, slightly lower than ~~operating~~segment earnings of ~~$27.4~~$33.0 million in the ~~third~~second quarter of ~~2015. Operating~~2016. Segment earnings in the first ~~nine~~six months of ~~2016 of $90.9~~2017 were $65.0 million, ~~were~~ approximately ~~eight~~nine percent higher than ~~operating~~segment earnings of ~~$84.5~~$59.8 million in the first ~~nine~~six months of ~~2015.~~2016. China currency translation negatively impacted ~~operating~~segment earnings by ~~approximately~~ $2 million and $5$3.6 million in the ~~third~~second quarter and first ~~nine~~six months of ~~2016,~~2017, respectively. ~~The~~In both periods of 2017, higher ~~operating earnings in the third quarter and first nine months of 2016~~China sales, including a price increase, were ~~primarily due to higher sales in China,~~ partially offset by increased SG&A expenses in China. Segment earnings in the second quarter of 2017 were further impacted by higher steel prices and a less profitable mix in China resulting in a decrease in segment earnings compared to the same period last year. Higher SG&A expenses ~~were higher~~ in the ~~third quarter and first nine months of 2016~~2017 periods were primarily due to higher selling and advertising expenses in China to support ~~our~~brand building and the expansion of water treatment and air purification retail outlets in tier

~~two~~ 2 and tier three cities and our e-commerce platform. Additionally, the third quarter of 2016 was impacted by higher advertising expenses to promote our products in China during the Summer Olympic Games and the European Soccer Championship – Euro 2016. Operating3 cities. Segment margin of ~~12.9~~11.9 percent in the ~~third~~second quarter of ~~2016~~2017 was ~~slightly higher~~lower than ~~the operating~~our segment margin of ~~12.6~~13.8 percent in the same period last year. ~~Operating~~Segment margin of ~~13.0~~12.2 percent in the first ~~nine~~six months of ~~2016~~2017 was ~~slightly~~ lower than ~~the operating~~our segment margin of ~~13.3~~13.1 percent in the ~~same period~~first six months of last year. ~~Operating~~Segment margins in both the ~~third~~second quarter and first ~~nine~~six months of ~~2016~~2017 were ~~impacted by~~lower than the same periods last year primarily due to the factors mentioned above. ~~In addition, our operating margin in the third quarter of 2016 benefitted from smaller losses in India.~~ We expect our full year ~~operating~~segment margin to be ~~slightly above 13~~approximately 14 percent in ~~2016.~~2017. We project improved segment margin in the second half of 2017 compared to the first half due to a full half year benefit of the price increase and lower advertising expenses as a percentage of sales in China. Additionally, lower losses in India as compared to 2016 will contribute to higher segment margins in the second half of 2017.

We expect ~~our~~total company sales to grow between ~~eight~~ten and ~~8.25~~11 percent in 2017 and between 11.5 and 12.5 percent in in local currency and between six and 6.25 percent in U.S. dollars in 2016. These growth rate forecasts reflect assumptions for currency underlying our organic growth at current exchange rates, except they assume continued depreciationterms. With record earnings in the ~~China currency rate to an average~~first and second quarters of ~~6.80 to~~ the ~~U.S. dollar in the fourth quarter. We expect China sales growth at a rate greater than 16 percent in local currency in 2016. As a result of continued strong performance in China and in North America,~~year, we increased the midpoint of our guidance for ~~2016.~~2017. We believe we will achieve ~~full year~~full-year earnings of between ~~$1.81~~$2.07 and ~~$1.83~~$2.11 per ~~share. These estimates do not include~~share, which excludes the potential impact from future acquisitions.

Working capital of ~~$825.5~~$934.5 million at ~~September~~June 30, ~~2016~~2017 was ~~$63.3~~$138.1 million higher than at December 31, ~~2015~~2016 primarily due to sales-related increases to accounts receivable balances, higher inventory levels and lower receipts of cash ~~and marketable securities balances located outside~~in advance of ~~the U.S., higher global inventory balances and higher working capital resulting~~sales from ~~the acquisition of Aquasana which were partially offset by higher accounts payable balances~~distribution customers in China. As of ~~September~~June 30, ~~2016,~~2017, essentially all of our ~~$678.8~~$740.9 million of cash, cash equivalents and marketable securities was held by our foreign subsidiaries. We would incur a cost to repatriate these funds to the U.S. and ~~$44.4~~have accrued $37.8 million ~~remains accrued~~ for the repatriation of a portion of these funds.

Cash provided by operating activities in the first ~~nine months~~half of ~~2016 increased to $263.6~~2017 was $73.2 million compared with ~~$237.1~~$155.1 million of cash provided by ~~operating activities~~operations during the same period last year. Higher earnings ~~partially~~were more than offset by higher outlays for working ~~capital~~capital. These factors resulted in lower cash flow in the ~~increase in cash provided by operating activities in 2016.~~first half of 2017. For the full year ~~2016,~~2017, we expect ~~total~~ cash provided by operating activities to be approximately ~~$325~~$375 million.

Capital expenditures totaled ~~$58.7~~$36.3 million in the first ~~nine months~~half of ~~2016,~~2017, compared with ~~$53.1~~$37.7 million ~~spent~~ in the year ago period. We project ~~2016~~2017 capital expenditures will be approximately ~~$95 million to~~ $100 million, including ~~approximately $10 million to support our ERP system implementation and approximately $27~~an estimated $45 million related to capacity expansion to support growth of water treatment and air purification products in ~~China and the U.S.~~China. We expect full year depreciation and amortization will be approximately ~~$66~~$70 million.

In December ~~2012,~~2016, we completed a ~~$400~~$500 million multi-currency credit facility with a group of ~~eight~~nine banks, which expires in December ~~2017.~~2021. The facility has an accordion provision ~~which~~that allows itus to ~~be increased~~increase it up to ~~$500~~$700 million if certain conditions (including lender approval) are satisfied. Borrowing rates under the facility are determined by our leverage ratio. The facility requires us to maintain two financial covenants, a leverage ratio test and an interest coverage test, and we were in compliance with the covenants as of ~~September~~June 30, ~~2016.~~2017.

The facility backs up commercial paper and credit line borrowings. As a result of the long-term nature of this facility, our commercial paper and credit line borrowings, as well as drawings under the facility, are classified as long-term debt. At ~~September~~June 30, ~~2016,~~2017, we had available borrowing capacity of ~~$153.4~~$255.0 million under this facility. We believe the combination of available borrowing capacity and operating cash ~~flow~~flows will provide sufficient funds to finance our existing operations for the foreseeable future.

In ~~January 2015,~~November 2016, we issued ~~$75~~an aggregate of $45 million of fixed rate term notes in two tranches to antwo insurance ~~company.~~companies. Principal payments commence in ~~2020~~2023 and 2028 and the notes mature in ~~2030.~~2029 and 2034, respectively. The notes ~~have an~~carry interest ~~rate~~rates of ~~3.52 percent.~~2.87 percent and 3.10 percent, respectively. We used proceeds from the issuance of the notes to pay down borrowings under our revolving credit facility.

Our total debt increased ~~$87.2~~$51.5 million from ~~$249.0~~$323.6 million at December 31, ~~2015~~2016 to ~~$336.2~~$375.1 million at ~~September~~June 30, ~~2016, primarily due to~~2017, as our cash flows generated in the ~~acquisition of Aquasana.~~U.S. were more than offset by our share repurchase activity and dividend payments. Our leverage, as measured by the ratio of total debt to total capitalization, was ~~18.1~~18.9 percent at ~~September~~June 30, ~~2016,~~2017, compared with ~~14.7~~17.6 percent at December 31, ~~2015.~~2016.

Our pension plan continues to meet all funding requirements under ~~Employee Retirement Income Security Act~~ERISA regulations. We are not required to make a contribution to the plan in 2016. However, primarily due to our expected continued strong cash flow generation and escalating Pension Benefit Guaranty Corporation insurance premiums, we made a $30 million voluntary contribution to the plan in 2016.2017.

In ~~2015,~~2016, our Board of Directors approved adding ~~4,000,000~~3,000,000 shares of ~~Common Stock~~common stock to an existing discretionary share repurchase authority. Under ~~our~~the share repurchase program, weour common stock may ~~purchase our Common Stock~~be purchased through a combination of a Rule 10b5-1 automatic trading plan ~~purchases~~ and discretionary purchases in accordance with applicable securities laws. The stock repurchase authorization remains effective until terminated by our Board of Directors, which may occur at any time, subject to the parameters of any Rule 10b5-1 automatic trading plan that we may then have in effect. ~~We completed a two for one stock split on October 5, 2016. Adjusting for the split, during~~During the first ~~nine months~~half of ~~2016,~~2017, we repurchased ~~2,546,954~~1,278,850 shares of our stock at a total cost of ~~$100.2 million and a~~$66.2 million. A total of ~~2,632,558~~approximately 3,600,000 shares ofremained on the existing repurchase authority ~~remained~~ at ~~September~~June 30, ~~2016.~~2017. Depending on factors such as stock price, working capital requirements and alternative investment opportunities, we ~~anticipate spending~~expect to spend approximately $135 million on stock repurchases through our Rule 10b5-1 automatic trading plan in ~~2016.~~2017. In addition, we may opportunistically spend an additional $65 million on share repurchases in 2017.

On ~~October 6, 2016,~~July 10, 2017, our Board of Directors declared a ~~regular~~ cash dividend of ~~$0.12~~$0.14 per share on our Common Stock and Class A common stock. The dividend is payable on ~~November~~August 15, ~~2016~~2017 to shareholders of record on ~~October~~July 31, ~~2016.~~2017.

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the U.S., which requires the use of estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The critical accounting policies that we believe could have the most significant effect on our reported results or require complex judgment by management are contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016. We believe that ~~as of September~~at June 30, ~~2016~~2017, there has been no material change to this information.

Refer toRecent Accounting Pronouncements in Note 1 – Basis of Presentation in the notes to our condensed consolidated financial statements included in Part 1 Financial Information.

This filing contains statements that we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “forecast,” “guidance” or words of similar meaning. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this filing. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: a further slowdown in the growth rate of the Chinese economy and/or a decline in the growth rate of consumer spending in China; potential weakening in the high efficiency boiler segment in the U.S.; significant volatility in raw material prices; our inability to implement ~~and~~or maintain pricing actions; potential weakening in ~~the~~ U.S. residential or commercial construction or instability in our replacement markets; ~~uncertain costs, savings and timeframes associated with our implementation of our new enterprise resource planning system;~~ foreign currency fluctuations; our ability to ~~execute~~successfully integrate or achieve our ~~acquisition strategy;~~strategic objectives resulting from acquisitions; competitive pressures on our businesses; the impact of potential information technology or data security breaches; changes in governmental regulations or regulatory requirements; and adverse developments in general economic, political and business conditions ~~and capital market deterioration.~~

in key regions of the world. Forward-looking statements included in this filing are made only as of the date of this filing, and we are under no obligation to update these statements to reflect subsequent events or circumstances. All subsequent written and oral forward-looking statements attributed to ~~us,~~the Company, or persons acting on our behalf, are qualified entirely by these cautionary statements.

As is more fully described in our Annual Report on Form 10-K for the year ended December 31, ~~2015,~~2016, we are exposed to various types of market risks, including currency and certain commodity risks. Our quantitative and qualitative disclosures about market risk have not materially changed since that report was filed. We monitor our currency and commodity risks on a continuous basis and generally enter into forward and futures contracts to minimize these exposures. The majority of the contracts are for periods of less than one year. ~~We do~~Our Company does not engage in speculation in our derivative strategies. It is important to note that gains and losses from our forward and futures contract activities are offset by changes in the underlying costs of the transactions being hedged.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act). Based upon ~~their~~this evaluation of these disclosure controls and procedures, ~~the~~our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of ~~September~~June 30, ~~2016~~2017 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC rules and forms, and to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding disclosure.

There have been no significant changes in our internal control over financial reporting during the quarter ended ~~September~~June 30, ~~2016~~2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes in the legal and environmental matters discussed in Part 1, Item 3 and Note 1413 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016.

~~We completed a two-for-one stock split on October 5, 2016. Amounts below have been adjusted to reflect the stock split.~~ In ~~2015,~~2016, our Board of Directors ~~authorized the purchase of an additional 4,000,000~~approved adding 3,000,000 shares of Common Stock to an existing discretionary share repurchase authority. Under the share repurchase program, the Common Stock may be purchased through a combination ofRule 10b5-1 automatic trading plan and discretionary purchases in accordance with applicable securities laws. The number of shares purchased and the timing of the purchases will depend on a number of factors, including share price, trading volume and general market conditions, as well as working capital requirements, general business conditions and other factors, including alternative investment opportunities. The stock repurchase authorization remains effective until terminated by our Board of Directors which may occur at any time, subject to the parameters of any Rule 10b5-1 automatic trading plan that we may then have in effect. In the ~~third~~second quarter of ~~2016,~~2017, we repurchased ~~382,558~~672,000 shares at an average price of ~~$47.01~~$53.63 per share and at a total cost of ~~$18.0~~$36.0 million. As of ~~September~~June 30, ~~2016,~~2017, there were ~~2,632,558~~3,627,553 shares remaining on the existing repurchase ~~authority.~~authorization.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has authorized this report to be signed on its behalf by the undersigned.


Delaware		39-0619790
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer
~~incorporation or organization)~~		Identification No.)

11270 West Park Place, Milwaukee, Wisconsin		53224-9508
(Address of principal executive office)		(Zip Code)


		Page
~~Item 1.~~Part I.	~~Financial Statements (Unaudited)~~FINANCIAL INFORMATION

	Condensed Consolidated Statements of Earnings - Three and ~~nine months ended September~~Six Months Ended June 30, ~~2016~~2017 and ~~2015~~2016		3

	Condensed Consolidated Statements of Comprehensive Earnings - Three and ~~nine months ended September~~Six Months Ended June 30, ~~2016~~2017 and ~~2015~~2016		3

	Condensed Consolidated Balance Sheets - ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016		4

	Condensed Consolidated Statements of Cash Flows - ~~Nine months ended September~~Six Months Ended June 30, ~~2016~~2017 and ~~2015~~2016		5

	Notes to Condensed Consolidated Financial Statements - ~~September~~June 30, ~~2016~~2017		6-19

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20-25

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		2526

Item 4.	Controls and Procedures		~~25-26~~26

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings		27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		27

Item 5.	Other Information		27

Item 6.	Exhibits		27

Signatures			28

Index to Exhibits			29


ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number of Shares that may yet be Purchased Under the Plans or Programs
July 1 – July 31, 2016		24,000	$	41.85		24,000		2,991,116
August 1 – August 31, 2016		115,250		47.30		115,250		2,875,866
September 1 – September 31, 2016		243,308		47.38		243,308		2,632,558


ISSUER PURCHASES OF EQUITY SECURITIES
Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that may yet be Purchased Under the Plans or Programs
April 1 – April 30, 2017		212,000	$	50.61		212,000		4,087,553
May 1 – May 31, 2017		238,500		54.05		238,500		3,849,053
June 1 – June 30, 2017		221,500		56.06		221,500		3,627,553


Three Months Ended September 30 (dollars in millions):
Derivatives in ASC 815 cash flow hedging relationships	Amount of gain (loss) recognized in OCI on derivative (effective portion)						Location of gain (loss) reclassified from accumulated OCI into earnings (effective portion)	Amount of gain (loss) reclassified from accumulated OCI into earnings (effective portion)						Location of gain (loss) recognized in earnings on derivative (ineffective portion)	Amount of gain (loss) recognized in earnings on a derivative (ineffective portion)
	2016			2015				2016			2015				2016		2015
Foreign currency contracts	$	0.8		$	3.0		Cost of products sold	$	(0.3	)	$	1.9		N/A	$	—	$	—
Commodities contracts		(1.1	)		(0.2	)	Cost of products sold		0.7			(0.1	)	Cost of products sold		—		—

	$	(0.3	)	$	2.8			$	0.4		$	1.8				—		—


Three Months Ended June 30 (dollars in millions):
Derivatives in ASC 815 cash flow hedging relationships	Amount of gain (loss) recognized in OCI on derivative (effective portion)					Location of gain (loss) reclassified from accumulated OCI into earnings (effective		Amount of gain (loss) reclassified from accumulated OCI into earnings (effective portion)					Location of gain (loss) recognized in earnings on derivative (ineffective		Amount of gain (loss) recognized in earnings on a derivative (ineffective portion)
	2017		2016			portion)		2017		2016			portion)		2017		2016
Foreign currency contracts	$	0.4	$	(1.1	)		Cost of products sold	$	0.6	$	(1.0	)		N/A	$	—	$	—
Commodities contracts		0.1		0.8			Cost of products sold		0.6		—			Cost of products sold		—		—

	$	0.5	$	(0.3	)			$	1.2	$	(1.0	)			$	—	$	—


		A. O. SMITH CORPORATION

~~November~~August 8, ~~2016~~2017	~~/s/~~	/s/ Daniel L. Kempken
		Daniel L. Kempken
		Vice President and Controller

~~November 8, 2016~~	~~/s/~~	/s/ John J. Kita
		John J. Kita
		Executive Vice ~~Presidentand~~ President and Chief Financial Officer


Exhibit Number		Description

10.1		Form of A. O. Smith Corporation Special Retention Agreement

31.1		Certification of ~~Periodic Report by~~ the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

31.2		Certification of ~~Periodic Report by~~ the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

32.1		Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

32.2		Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

101		The following materials from A. O. Smith Corporation’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2016~~2017 are filed herewith, formatted in XBRL (Extensive Business Reporting Language): (i) the Condensed Consolidated ~~Statements~~Statement of Earnings for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~2016, (ii) the Condensed Consolidated ~~Statements~~Statement of Comprehensive Earnings for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~2016, (iii) the Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2016,~~2017, and December 31, ~~2015,~~2016 (iv) the Condensed Consolidated ~~Statements~~Statement of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015 and~~2016 (v) the Notes to Condensed Consolidated Financial Statements

Large accelerated filer

Accelerated Filer

Non-accelerated filer

¨☐ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company